Data point: In China, retail investors are not allowed to short-sell. China's stock market has had an unprecedented rally over the last 2 years (up 600% from Jul 05 to Oct 07) and then an unprecedented collapse recently (down 66% since then).
In econ & finance textbooks, the theoretically predicted result of this is that it exacerbates market swings. When the market is overvalued, there's no check on its upward movement caused by short-selling. When it's undervalued, there's no check on its downward movement from short covering. It's always hard to sort out causation from correlation - there could be dozens of other factors at work - but China's experience seems to support the theory.
As for your appeal to authority, it's possible for the SEC to know more than furiouslol and still do this, as long as they're incentivized to do so. Byrneseyeview's comment on another story here explains how:
I'm totally serious. You can ask anyone who knows about the market and get their candid opinions.
I don't know how long they're going to effect this ban but to give you a preview of what banning short sell can do, just take a look at the China stock market. The chart is like the Eiffel tower.
The shorts make the market effective as they provide a floor at a bottom where no one else may be willing to buy.
I'm all for a permanent ban on naked short sells but to have an outright ban of all short sells is plain stupid.
It's not that I disagree with you, I really don't have enough knowledge to decide. I haven't the slightest clue how long they want to prevent short selling for (I think the article got cut off since I don't subscribe) or what sort of effect that short term action might have.
I was just wondering how you came to the decision that it's stupid. It seems you'd need a lot of knowledge to be reasonably sure of that, given that other people with a lot of knowledge made the decision.
It's too much of a coincidence that this move is effected a few days after McCain publicly chastised SEC Chairman Chris Cox and said he would fire him if he were president.
Has McCain spoken out in favor of something like this? This would seem to be pretty out of line with typical Republican doctrine. I don't see this as being an attempt to save his job, it's clearly not going to happen if McCain is elected.
McCain is often pretty out of line with typical Republican doctrine. I'm not sure the ban is specifically a McCain thing, but it does seem very political. Far fewer people complained about rich Wall Street fat cats when those fat cats got rich by making mortgages cheap; now that a few of them have gotten rich by betting that mortgages would be priced rationally again, folks are upset.
It goes a lot deeper than that. Short selling is actually ruining the ability of financial institutions that aren't even exposed to the mortgage problems (or are minimally so) to get the inflow of credit they need. Or so the argument goes.
Again, I'm not an economist, so I don't have a strong opinion here. What I do know is that people who know a hell of a lot more than me (or probably anyone who posts here) are making these decisions, so dismissing them based on some generalized knowledge (i.e. short selling is bad because my econ 101 textbook said so) seems childish.
That's why I was asking the original commenter if, perhaps, he knew enough about economics to have an informed opinion. For all I know, he has a PhD in it.
